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Measuring the Merger: Fact, Fiction, and Prediction

Fortnightly Magazine - October 1 1996

each year, it becomes increasingly difficult to identify and measure the achieved benefits versus the planned benefits of merging."

A Process in Progress

Accelerating competition and deregulation in the industry brought many utilities to the negotiating table this past year (em a merger being their primary strategy for progress and survival. While the six merger transactions announced from May 1995 to January 1996 share similarities, three announced since then are unique: The Texas Utilities/ENSERCH transaction is not subject to the lengthy FERC approval process. The Enron/Portland General Electric transaction gives Enron its first crack at the retail electric markets; the Houston Industries/NorAm Energy Corp. transaction is similar. This change in merger activity can be attributed to:

s FERC merger policy under consideration

s Comprehensive, proposed federal legislation

s Potential modification or repeal of the Public Utility Holding Company Act and the Public Utility Regulatory Policies Act

s FERC Order 888

s State retail wheeling initiatives.

But another possibility exists: Much of the low-hanging fruit has already been picked. Most of the mergers cited here involve low-cost contiguous utilities (em a shrinking population. Many utilities have already implemented restructuring and employee reduction programs that will strip costs out of their companies, thus eliminating or reducing some of the potential merger benefits.

As the rules become more clearly established under transition, we anticipate:

s Noncontiguous combinations

s Continued combinations of electric and gas companies

s Continued unsolicited offers and hostile takeover attempts

s Strategic or operational alliances

s Acquisitions of utilities immediately before or after bankruptcy

s Transactions with other energy-related and telecommunications companies

s Acquisitions by global energy companies (domestic and foreign)

s Disaggregation/spinoff transactions

We expect to see energy companies redefined in many shapes and sizes. The tumultuous changes on the horizon provide a business environment ripe for continued, albeit potentially modified, M&A activity. t

Michael J. Hamilton is a partner at Price Waterhouse LLP, and chairman of the U.S. Utilities Industry Services, World Utilities Group.

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